Reagan strategy: take inflation bump early, then coast

Washington
— There's a time-honored strategy for new administrations: make the tough economic decisions early on. Then the unpopular results can be past and hopefully forgotten come the next election.

That is what President Reagan did in the case of oil. One of his first decisions was to decontrol domestic oil production. As expected, petroleum prices shot up. The subsequent rise in gasolien and fuel oil prices was the leading factor behind the bounce back in the consumer price index (CPI) to an annual rate of 12.1 percent in February, three percentage points above the 9.1 percent figure for January.

Indeed, Department of Labor analyst Jesse Thomas reported March 24 that had energy prices held steady in February, the inflation rate would have been only 3 .9 percent on an annual basis. The energy portion of the price measure contributed 54.3 percent of the total increase.

President Reagan could have let the oil price controls expire by next fall as scheduled. But that would have dragged its inflation effects perilously close to the 1982 congressional elections. The quick decontrol strategy, combined with tough monetary and fiscal policies, leaves the administration with some hope for a low inflation rate by the time the electorate goes to the polls.

The Reagan administration forecasts anticipate a 7 percent inflation rate by 1983. Some economists have argued that this is too optimistic. Others -- particularly those who put great weight on the monetary restraint imposed by the Federal Reserve System -- figure the inflation rate could drop even lower.

One important factor in future inflation will be the level of wage settlements, and the agreement reached by coal company operators and union leaders this week was not regarded as helpful in this regard. Pay and benefits are to increase 35 percent over the next three years. The fear is that this may be a juicy target for other labor groups to aim at.

"That's not consistent with the administration's CPI forecast," says Donald Ratajczak, head of Georgia State University's economic forecasting unit. "Certainly people in strong industries will be thinking that's the thing to shoot for."

Yesterday's consumer price figures showed food and housing costs rising only slightly, but this could change significantly later in the year.

"We do think that food prices, which have been moderating recently, are going to rise," reports Leif Olsen, chairman of Citibank's economic policy committee.

Because of high interest rates, many farmers have been slaughtering cattle at a higher-than-average rate. This has tended to depress meat prices, but will not continue into the summer. The possibility of another drought this year causes additional concern about rising food prices.

Some economist predict another housing boom, caused not by inflation-fed speculation but a real demand for shelter. This could boost the cost of homes, as could the high cost of borrowing to build or buy.

"Mortgage interest rates will stay very high, edging a little bit lower but not more than a percentage point," says Lawrence Chimerine, chairman and chief economist of Chase Econometrics.

Aside from food and energy (including the volatile situation between Iran and Iraq and the impact this could have on oil prices), there are other key uncertainties in the future inflation equation. These are largely political.

It is far from certain that Congress this year will fully go along with the President's plan to cut federal spending and taxing. Reagan's inflation forecast is keyed to this. Beyond 1981, further cuts in government spending would have to be made, and some observers doubt that Congress will be as compliant as it has been so far on budget cutting. How this will affect (or be affected by) "inflation psychology" is unknown.

Murray Weidenbaum, chairman of the President's Council of Economic Advisers, told the Joint Economic Committee on Capitol Hill yesterday that the latest inflation figures "point up the need for prompt enactment of the President's economic recovery program."

In any case, Mr. Weidenbaum said, the country can expect a "disappointing 1981" marked by slow economic growth and continued double-digit inflation. "Barring further oil disruptions or crop problems," he predicted an improvement in inflation figures into 1982.